Thursday, March 26, 2009

Back To The Pain Cave


QE promised so much, yet has delivered so little (even less than yesterday after the poor auctions in the UK and US.)

And so perhaps March is what we thought it was: a month of erratic price action in which positioning trumps all else. It was looking that way anyhow until the SNB dropped their bombshell; and hey, it's hardly the first time we've been in the pain cave.

It's usually not a good sign when Macro Man's morning inbox is littered with New Zealand fixed income commentaries, and so it proved again this morning. New Zealand rates inexplicably started rising late yesterday in London, continued through the New York afternoon, and then surged into a full-blown panic in early Wellington trade. Stop-losses and rumoured mortgage paying were behind the rise....which abruptly ended as suddenly as it began, taking 2 year rates down nearly 40 bp from where they'd been a few hours earlier.Yesterday, the Norges Bank cut rates to 2%, as expected, but also hinted that rates would likely trough at 100 bps, lower than the market had priced. They also observed that a somewhat lower krone was naturaly in the context of the global financial crisis. Given that long NOK had been one of the market's sacred cows, it naturally took a swift trip to the abattoir.

Yet even that wasn't the FX pain trade of the day, pride of place must go to the farce surrounding some comments from Tiny Tim yesterday. Speaking at the CFR, Geithner said that although he hadn't read PBOC governor Zhou's recent proposal, he was certainly open to expanding the pool of IMF SDRs. This was an innocuous enough comment, as the IMF is likely set to see its funding levels increase dramatically.

Yet somehow the Reuters newswire managed to run this comment into a headline suggesting that Geithner was open to using the SDR as an anchor in a new multilateral reserve currency, i.e. ending the dollar's current dominance. Unsurprisingly, the dollar got swiftly smacked (leaving dealers shouting "WTF!?!" until the offending headline was spotted), retracing part of the losses after a hasty clarification was made.Remember, policymakers: stay on message, keep it clear, and keep it simple. Although one thought did occur to Macro Man yesterday. Given the yawning size of the US budget deficit, perhaps the Federales have decided to generate a little revenue on the side, a la Voldemort and friends? Perhaps the US Treasury has decided to buy overnight options in EUR/USD, and then let Geithner step up to the mike. Hedge your gamma, and boom! You've paid for half an hour of bank bailouts. Yippee!

Finally, a video clip that both gladdens and saddens Macro Man. While he is pleased to see the government inquiring into the shadowy cabal at the heart of the banana republic, can we really not do any better than Maxine Waters? Really, she shouldn't be running a lemonade stand, let alone part of the US government. The look on Geithner's face when she misunderstands the difference between a chief of staff and CEO is priceless. It's a small ray of light in an otherwise dark and chilly pain cave...


CV said...

"The look on Geithner's face when she misunderstands the difference between a chief of staff and CEO is priceless."

He he indeed MM, he has that familiar "does not compute" face on. Anyway, what a fascinating thought that the Treasury is playing short term options on the USD and using Mr. Geithner (Tiny Tim? Come on guys give him a break :)) as a trigger.


BlueMonday said...

I'd would not try to read too much in market right now. Official and "unofficial" stress testing is going on right now around quarter end and bank balance sheets, risk profiles have to come down fast. So this will probably continue until next week.

If "markets events" like failed Gilt auctions, Euribor going down despite very dovish ECB continue in April, then they will have a lot more meaning I'd say.

Anonymous said...

"pain cave" aka "the hurt locker"

Anonymous said...

March 24, 2009

The Editor

Financial Times


Structured investment vehicles to invest in tranched mortgage-backed securities with plenty of leverage have been duly condemned for the huge problems and losses they caused. So to solve the problems the United States Treasury now brings us structured investment vehicles to invest in tranched mortgage-backed securities with plenty of leverage provided by the taxpayers. Hair of the dog?

Yours faithfully,

Alex J. Pollock

Resident Fellow

American Enterprise Institute

Washington, DC

Forex Watcher said...

Maxine Waters is a product of that fine old American institution of electoral district gerrymandering. Since Maxine Waters is black is a district that has been artificially constructed and boundary lines to insure a black representative, she will be elected again and again and again on the basis of her race, not her intellect or integrity. Is is all in the name of "fair and balanced" you see.

Vasastan said...

About the US system: do US congress reps actually govern or exercise any power at all? Or, are they "voting cattle" like the elected reps of several other countries, following the instructions of their parties?
In other words, should we worry about the likes of Ms. Waters or is she just a sideshow for the media?

Macro Man said...

They are certainly more independent than, say, MPs in the UK. Because they face election every 2 years, they tend to vote on lines that play well with their constituents.

And because Congress signs the checks, they do matter.

Anonymous said...

Enjoyed that clip, bit of brightness in an otherwise darkened cave. Her questioning of the TARP CEOs is also priceless. Underlines my thinking that at this stage the biggest risk is political, not much you can do though.
Cheers, JL

Anonymous said...

Elections of each Congress member every 2 years? Is it not each 4 years, but halve the congress is up for (re) election each 2 yrs?

Macro Man said...

Each member of the House is up for election every 2 years. The Senators have terms lasting six years, with members up for re-election in a staggered fashion....1/3 every 2 years.

Anonymous said...

Oooh lemonade stands...can we regulate those too?

tyaresun said...

You want to cut some slack for Turbo Tim but not Maxine? Give me a break. It is the elite that brought down the system this time and every other time.

Jeffrey D. Benson said...

I agree. The people's congressional choice is ridiculous. A continually unfolding portion of this crisis is how stupid the American people really are. Question. So the economic environment is deflationary. Real Estate and Commodities are likely to continue to fall as de-leveraging puts pressure on the weakness of these assets. The stock market is in the dumps, many experts predict more pain and possible nationalization of the banks. The dollar looks subject to more weakness, considering that regardless if QE gets any traction the printing press has been on (for a while). So in real estate, no commodities, no market, and don't hold dollars. Where the &%$# does someone invest? This sucks.

Anonymous said...

Question for the experts: what do you thing of long the Brazilian Real against the US Dollar as a mid-term/long-term trade?

My thinking is:
1) decent reflation trade,
2) very little household/corporate leverage in Brazil relative to the US, &
3) stark contrast in attitudes of respective central bankers suggests to me a favorable environment for Brazil's currency.

freude bud said...

I think it is rather unfair to characterize her slip as a "misunderstanding" of the difference between a CEO and a chief of staff.

If you were to be reasonably unfair equally to all, you would surely accuse Geithner of deliberately being obtuse, in order to draw out his answer and thus eat up the Congresswoman's time.

She has been a member of Congress for nearly 20 years ... it's a Dem district, but no primary challenge has proven successful in 9 contests. No matter what you think of her politics, she ain't dumb, and you would be rather simple to think so.

There are plenty of people who are not particularly familiar with the inner workings of the banking system who are plenty smart.

Macro Man said...

She knows how to stay in power, you can grant her that. Then again, W had two terms in the White House, and I don't see anyone rushing his Mensa application through.

Regardless, she is a prime example of the pisspoor calibre of many US elected representatives, as a cursory glance at her track record will illustrate.

Anonymous said...

I do not mind that some people in power have no knowledge of economics. After all, there are many other aspects. But why did she get the chance to be in the committee to ask the secretory of teasury question? I mean, they should let those who have some ideas about economy to sit on that economic committee, shouldn't they?

Anonymous said...

Don't know if you saw this or not, but watching Dick Shelby and a few others on the Senate Banking Committee having cognizant exchanges with Chris Whalen gave me some hope.
Whalen's opening remarks start at about the 50 minute mark, and the exchange with Shelby, who comes right after Dodd is pretty good.


Anonymous said...

I just want to know how Will Ferrel from Saturday Night Live got behind Maxine?
Watch him behind her... hillarious.


Anonymous said...

Yesterday, the Norges Bank cut rates to 2%, .... Given that long NOK had been one of the market's sacred cows, it naturally took a swift trip to the abattoir.

Hmm - Why, there is no recession in Norway. Is Norway perhaps trying to patch up the abysmal performance of the Oil Fund?

They must have taken a huge hit on USD too recently!

EC said...
The Pain Cave

nemo said...

"Maxine Waters is a product of that fine old American institution of electoral district gerrymandering. Since Maxine Waters is black is a district that has been artificially constructed and boundary lines to insure a black representative ..."

If you look at the map of Maxine Waters's district, it does not appear to have been heavily gerrymandered:

If you want to see what a true gerrymandered district really looks like, look at what happened to Travis County (surrounding Austin Texas) after Tom Delay and the Texas Republicans got through with it:

They did that in order to dilute the heavily Democratic population of Travis County into 3 separate districts dominated by Republicans. Delay and the Texas GOP really had to contort geography to make it happen.

Waters's district in Los Angeles looks pretty normal. LA has a huge black population, so it's to be expected that at least one Congressional district will be heavily black without gerrymandering.

Also, it sounds in that clips as if Waters made a slip of the tongue when she said CEO. She corrected herself with the term chief of staff when she realized Geithner was confused.